Mortgage News: Huge Changes to 2010 Good Faith Estimate (GFE)
By: Drew Peterson
It’s a New Year, and along with the New Year are a new set of HUD regulations. Of these, the most substantial has been Changes to the Good Faith Estimate, (GFE.) Effective January 1st, 2010, the GFE that Brokers and Lenders are required to issue to borrowers at the time of application has been given a complete makeover. While the federal mandate is being implemented to make it easier for borrowers to shop by giving an oversimplified, (A+B=C) total of settlement charges, the finished product has the potential to leave both borrowers and finance professionals more confused and misinformed than in 2009.
There are parts of the new guidelines lenders must abide by that are fantastic for anyone who had ever fallen victim to the unethical practice of ‘bait and switch’, (When your closing costs at time of closing come nowhere near the costs you were initially quoted on your GFE). The GFE is now binding to 0.125% of the initial quote, which means that the days of unpleasant surprises at closing are forever finished.
However, one of the most substantial changes is that the GFE that the lender presents is binding once it is issued. In today’s marketplace, where interest rates are taking drastic intra-day swings, this puts both banks and brokerages in a difficult position. Now that lenders are responsible for paying any underestimated costs out of their own pocket, you should expect to see closing costs, and your interest rate, grossly overestimated on the GFE you receive at time of application.
The new GFE form leaves much room for manipulation by including your A. Closing Costs, along with, B. Your escrow account set up, (Taxes and Insurance) to reach C. Total Settlement Charges. In the case of reduced or no closing cost loans, any funds that the lender is paying toward the closing costs is now shown as a credit to the borrower; If you’re not confused by now, you’re a leg up on 90% of consumers and loan originators alike.
For Example, you receive a quote from Marty’s Mortgage showing total settlement charges of 4K in total settlement charges. The 4K includes 1K in your new escrow account set up with 3K in closing costs. As any smart consumer does, you speak to a loan officer at Louie’s Loans to get another GFE to compare against Marty’s. You tell Louie that you have been quoted 4K at Marty’s, and Louie sends you a GFE showing 3K in total settlement charges. You choose to apply for financing through Louie’s Loans, as their total settlement charges are lower.
What then, has happened? Louie has simply left any escrow account set up off of his initial GFE. Because escrow account set up estimates are not binding, you find out at closing that your actual total settlement charges are actually 5K, comprised of 3K in closing costs and the same 2K in escrow account set up settlement.
A federal mandate was put into place in 2009 that has already made GFE’s binding to within 0.125%, making the new and ‘improved’ GFE a true case of, “If it ain’t broke, don’t fix it.” I would expect further changes to put into effect within the next several months to combat some of the loopholes that we’ve just finished discussing. In the meantime, what you can do is to educate yourself, and ask questions, especially if you are comparing GFE’s from different companies. “Are my settlement charges shown with an estimated set up based on my estimated closing date? ‘And if not, have you left room on my new loan amount to do so?” (You can also bring these monies to the closing table.)
Also, be certain of the interest rate you are going to lock as it will likely be lower than that shown on your initial GFE, and ask to receive a lock confirmation for your records. Remember that different interest rates carry different closing costs, so don’t be afraid to ask what other rates and closing costs are available before locking and be certain to compare apples to apples by comparing the same interest rate.
At the end of the day, this is a case of six in one hand, half dozen in the other to an educated borrower, and once everyone is accustomed to the new system, things will move much smoother than they are at present. Good luck out there and happy hunting!